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Workers' Compensation Subrogation
Negotiating within the Mine Field
by Michael D. Barrett
Summary
This article discusses the origin of the employer's subrogation interest, the variety of partial settlements affecting that interest, and the issues for trial that remain after partial settlement has occurred.
Introduction
An employee injured in the course and scope of employment has two causes of action. First, a claim may be brought against the employer for payment of workers' compensation benefits. Minn. Stat. § 176.031. Second, the employee may bring an action against responsible third parties whose conduct caused or contributed to the injury. Minn. Stat. § 176.061, Subd. 5(a)(2). The employee will often pursue both causes of action simultaneously or one after the other. The interplay between the workers' compensation system and tort liability system in these cases produces a variety of unique problems. This article explores the current state of the law concerning settlement of these cases, trial following partial settlements and where we are headed in this legal mine field.
The Birth of the Subrogation Interest
The Third Party Liability statute, Minn. Stat. § 176.061, presents a comprehensive plan for asserting the claims of both employee and employer against third parties and for distributing any sums recovered. Allstate Insurance Co. v. Eagle-Picher Industries, Inc., 410 N.W.2d 324, 327 (Minn. 1987). The employee may institute an action against third parties. The employer (and/or insurer) upon payment of benefits becomes subrogated to the injured employee's claim or enjoys a right of indemnity against third parties causing the employee's injury. Minn. Stat. § 176.061, Subd. 3, 5, 7 and 10. The employer also enjoys a separate additional cause of action against responsible third parties for any increase in workers' compensation premiums caused by the employee's injury, or to be more precise, caused by the payment of workers' compensation benefits required due to the injury. Minn. Stat. § 176.061, Subd. 5(b). Recovery of premiums however belongs to the employer alone and is not run through the formula.
The commencement of a lawsuit by the employee against responsible third parties asserts as well the subrogation claims of the employer. Liberty Mutual Ins. Co. v. Nutting Truck and Castor Co. 295 Minn. 211, 203 N.W.2d 542 (1975); Gullickson v. Lutsen Resort, Inc., 474 N.W.2d 216 (Minn. App. 1991). Often the employee and employer are involved as "co-plaintiffs" in the action, although the employer may not be identified in the caption of the action. The employer may choose to formally intervene in the employee's action to take an active role in the litigation and the right to do so is well recognized. Lang v. William Bros. Boiler & Mfg. Co., 250 Minn. 521, 85 N.W.2d 412 (1957); Norman v. Refsland 383 N.W.2d 673 (Minn. 1986). Although the employer may join the action, participation at trial may be restricted to preserve fairness to the third party. Groswitz v. Fiedler 435 N.W.2d 857 (Minn. App. 1989). The employer may also commence a separate action. See Jackson, at 623; Folstad at 611. In cases where the employer's negligence may have contributed to the employee's injury, the third party may bring a claim for contribution against the employer as a third-party defendant. Lambertson v. Cincinnati Corp. 257 N.W.2d 679 (Minn. 1977). This right of contribution is now codified in Minn. Stat. § 176.061, Subd. 11 (2000). But whether named in the action or sitting on the sidelines, the interests of the employer must be respected and taken into account by the parties in the trial or settlement of the action. See Jackson v. Zurich American Insurance Company, 542 N.W.2d 621 (Minn. 1996). If the action is tried to a verdict or settled in its entirety as to all claims and interests, the total verdict or settlement amount is shared between the employee and the employer in accord with the formula in Minn. Stat. § 176.061, Subd. 6. This is by far the most common resolution in these cases.
Settlement Options
In some cases, the employee may elect to ask the district court to allocate the total settlement amount between damages "recoverable" and "not recoverable" under the Minnesota Workers' Compensation Act. When the court has made its allocation, only the amounts allocated to the "recoverable" category are run through the statutory formula thereby reducing in most instances the amount available to reimburse the employer. Henning v. Wineman 306 N.W.2d 550 (Minn. 1981). The trade-off for the employee is that the employee who elects to have an award allocated forfeits his/her right to a one third formula share of the settlement amount remaining, after costs of collection are subtracted. See Henning at 553. Normally, the employee must secure the employer's agreement that the total amount of the settlement is reasonable before the court can allocate. Sargent v. Johnson, 323 N.W.2d 767 (Minn. 1982). The court may in certain circumstances, however, declare the amount of settlement reasonable as a matter of law over the objection of the employer, and then allocate. E.g.,Hewitt v. Apollo Group, 490 N.W. 898 (Minn. App. 1992) (Holding a policy limits settlement where tortfeasor is without other assets reasonable as a matter of law over employer's objection). Generally, the employee will elect allocation and retain more of the settlement amount if the damages that fall into the "not recoverable" category, such as loss of consortium or pain and suffering, are large relative to the amounts in the "recoverable" category. Electing this approach might also result in lowering of the future credit that the employer might otherwise apply against workers' compensation benefits payable.
Allocation by the trial court is made on a case by case basis and must be reasonable in light of the total settlement. Krause v. Merickel 344 N.W.2d 398 (Minn. 1984). Although the trial court retains wide latitude in determining allocation, at least some of the settlement must be allocated to the "recoverable" category since the total settlement amount includes the employer's claims. Kliniski v. Southdale Manor, Inc. 518 N.W.2d 7 (Minn. 1994). Any statements to the contrary in Hewitt notwithstanding, full compensation of the employee is not a pre- requisite for employer subrogation. Kliniski; Paine v. Water Works Supply Co., 269 N.W.2d 725 (Minn. 1978).
It is now clear that both the employee and the employer have damage claims that can be separately settled. See Liberty, 295 Minn. at 216, 203 N.W.2d at 545; Naig, at 894; Folstad at 611. The employee may make a "Naig settlement" which includes all damages except those recoverable under workers' compensation. Naig v. Bloomington Sanitation, 258 N.W.2d 891 (Minn. 1977). The employer may make a "Reverse-Naig settlement" which includes only those damages recoverable under workers' compensation. Folstad v. Eder 467 N.W.2d 608 (Minn. 1991). The proceeds from a Naig or Reverse-Naig settlement belong exclusively to the settling party and are not subject to the distribution formula in Minn. Stat. § 176.061, Subd. 6. Naig, at 894; Folstad, at 611, 612.
Another option involves purchase by the employee of the employer's claim and assignment of that claim to the employee. See Buck v. Schneider, 413 N.W.2d 569 (Minn. App. 1987); Katzner v. Kelleher Construction, 535 N.W.2d 825, 829 (Minn. App. 1995). Usually this is part of a full and final settlement of the workers' compensation claim and may include an agreement by the employee to release that part of the civil damage claim against third parties representing the employer's percentage of fault and indemnification of the employer by the employee for any Lambertson contribution claims.
The last option involves what has been affectionately called the "waive and walk." Since the Lambertson contribution claim, in effect, serves to simply offset the employer's subrogation claim (Horton by Horton v. Orbeth, Inc., 342 N.W.2d 112, 115 (Minn. 1984)), the employer may choose to simply waive recovery of its claim and "walk away" from the action. Theoretically, this would eliminate the rationale for any contribution claim, because in Lambertson, the sole reason for allowing the contribution claim was to address the inequity in some cases of an employer with high comparative fault recovering damages. Lambertson v. Cincinnati Corp. 257 N.W.2d 679,684 (Minn. 1977). If recovery of those damages is waived, then there is no longer any need for the contribution claim. This option has now been codified in Minn. Stat. § 176.061, Subd. 11 (2000).
Trial Following Partial Settlement
The partial settlements described above create unique trial issues for the unsettled remainder of the claim. There is, at best, an imperfect fit between the categories of damages recoverable in a civil tort action and the categories of workers' compensation benefits payable under the Minnesota Workers' Compensation Act. The similarities and differences are increasingly being examined by the Minnesota Supreme Court.
Damages in the form of past and future medical expenses, past and future wage loss and loss of future earning capacity are deemed to be "recoverable" under workers' compensation and therefore part of the employer's claim. A Reverse-Naig settlement would remove these from the action. See Tyroll, at 61; Folstad, at 613. Damages in the form of pain, suffering, disfigurement, general disability, embarrassment, mental anguish and loss of services or consortium are deemed "not recoverable" under workers' compensation and therefore are part of the employee's claim. In other words, this claim belongs to the employee and the employer cannot subrogate to recover these damages. A Naig settlement would remove these from the action. Tyroll v. Private Label Chemicals, Inc. 505 N.W.2d 54, 61 (Minn. 1993).
It remains unclear what to do about certain other categories of workers' compensation benefits, such as permanent partial disability, retraining or rehabilitation expense, which have no counterpart or equivalent under civil law. Some would argue that permanent partial disability falls into the category of "general disability" that is part of the employee's claim subject to settlement under a Naig release. However, by definition, a Naig settlement cannot include damages recoverable under workers' compensation and permanent partial disability is clearly recoverable under workers' compensation. Minn. Stat. §§ 176.021, Subd. 3 and 176.101, Subd. 3b. Retraining and rehabilitation expense appear closely tied to future earning capacity and would seem appropriately included in the claims of the employer. See Tyroll, p.61, footnote 8.
While trial of the damage claims remaining following a Naig or Reverse-Naig settlement can be confusing, the Supreme Court has said that the trial before a jury should be as much like an ordinary personal injury tort action as possible. Folstad, p. 613, footnote 4.
After a Naig Settlement
In M.W. Ettinger Transfer & Leasing Co. v. Schaper Mfg., Inc. 494 N.W.2d 29 (Minn. 1992), the employee had entered into a pre-trial Naig settlement with the third-party tortfeasor and the employer and insurer thereafter commenced an action to collect their subrogation claim. The Supreme Court held that in addition to proving liability, the employer and insurer must prove to the satisfaction of the jury the nature and extent of the employee's injury.
Some have read this decision to mean that the employer must prove the entirety of the employee's claim. The implication of other cases is that the court did not intend the proof should go that far. The court in Folstad, for instance, said the Reverse-Naig settlement in that case removed "recoverable" damages from the action. If that is true, then a Naig settlement must remove the employee's "not recoverable" damages from the action. Why would the remaining parties have to prove up damages to which they have no right and which have been removed from the action? There would seem to be no need to prove up the employee's pain and suffering damages, for example. These were settled out of the case by the Naig release and, in any case, are not a claim for which the employer has a subrogation interest. The addition of the "waive and walk" concept to Minn. Stat. § 176.061, Subd. 11 (2000) also supports this reasoning.
The most defensible reading of Ettinger is that proof should probably be limited to those categories of damages remaining in the action, namely past and future medical expense, past and future wage loss, loss of earning capacity and the like. The witnesses may testify the same way they would had there been no settlement, but settled damages will not appear on the verdict form. Typically the jury is not told of the employee's settlement and no evidence is presented to the jury concerning amounts of workers' compensation benefits paid by the employer. If the jury awards more in a given damage category than paid by the employer, then the employer makes a full recovery of the amounts paid and the excess is ignored. If the jury awards less than what has been paid, the employer recovers the lesser amount awarded by the jury. See Tyroll, at 61; Ettinger (concurring opinion), at 34.
Because the employee waives any share of the recovery by the employer as part of a Naig settlement, the formula in Minn. Stat. § 176.061, Subd. 6 does not apply and the entire recovery belongs to the employer. See Naig, at 894; Tyroll, at 60; Folstad, at 612. Furthermore, the third party cannot look to the employer for reimbursement of the amounts paid by the third party to secure the Naig settlement. Kempa v. E. W. Coons Co. 370 N.W.2d 414 (Minn. 1985). The verdict must be reduced by the percentage of causal negligence of the employee (Haase v. Haase 369 N.W.2d 311 (Minn. App. 1985)) and also by the percentage of causal negligence of the employer, if any. Kempa v. E. W. Coons Co. 370 N.W.2d 414, 419 (Minn. 1985); Tyroll, at 61. If the employee's negligence is greater than the third-party, there is no recovery. Minn. Stat. § 604.01; see Tyroll, at 61. The employee's fault and employer's fault are not "aggregated" for comparison to the fault of the third party. See Cambern v. Sioux Tools, Inc., 323 N.W.2d 795 (Minn. 1982).
After a Reverse-Naig Settlement
Following a pre-trial Reverse-Naig settlement, the employee proceeds to trial proving liability and only those categories of damages remaining in the action, namely pain, suffering, disfigurement, general disability, embarrassment, mental anguish and loss of consortium of the spouse, if applicable. "Ordinarily, there is no need to continue to assert in [the] action a subrogation claim that has been settled and is now out of the lawsuit." See Folstad, at 613. See also Minn. Stat. § 176.061, Subd. 11 (2000). The only presently enunciated exception is where the employee must prove that a tort threshold has been met under Minn. Stat. § 65B.51, Subd. 3. Evidence necessary to prove that a tort threshold has been met, such as proof of medical expenses incurred, is clearly permitted. See Folstad, at 613. When settlement damages are included in the verdict in order to determine if a threshold has been met, no subrogation interest in them can be asserted. The collateral source statute (Minn. Stat. § 548.36) will therefore apply to reduce the verdict accordingly. Krutsch v. Collin 495 N.W.2d 208 (Minn. App. 1993). See also Minn. Stat. § 176.061, Subd. 11 (2000). Since a Reverse-Naig settlement necessarily includes settlement of any Lambertson contribution claim, the verdict is reduced by the employee's percentage of negligence only and the third party pays the entire balance remaining. If the employee's negligence is greater than the third-party, there is no recovery.
The 2000 Legislature inserted the following language into Minn. Stat. § 176.061, Subds. 3, 5(a), 7 and 10:
[All benefits paid in workers' compensation are recoverable] regardless of whether such compensation is recoverable by the employee or the employee's dependents at common law or by statute.Employers and insurers siezed upon the added language to resurrect Todalen v. U.S. Chemical Co., 424 NW2d 73, 81 (Minn. App. 1988) which suggested that the damages in the subrogation action were simply the total amount of workers' compensation benefits paid and payable. The Supreme Court had rejected that idea in M.W. Ettinger Transfer & Leasing Co. v. Schaper Mfg., Inc., 494 N.W.2d 29, 34 (Minn. 1992).
Recently, without mentioning their earlier Ettinger decision, the Supreme Court held that the addition of the "regardless . . ." language to § 176.061 did not change the burden of proof by the employer/insurer in order to recover benefits paid from a third-party - a stranger to the workers' compensation system. The Court reminds us that the third-party is defending a tort claim, not a workers' compensation claim. The measure of damages recoverable by the employer/insurer are those workers' compenation benefits proven to the satisfaction of the jury to be reasonable, necessary and causally related to the injury suffered by the employee in the accident. Zurich American Ins. Co. v. Bjelland, ____ N.W.2d ____ (Minn. 2006).
Conclusion
Sorting out the various interests discussed above and resolving litigation aimed at vindicating those interests is a complicated and uncertain process making claims handling feel much like negotiating within a mine field. The courts have provided a good map of the mines known to exist. It is the mines that have yet to be discovered that present the real danger! Hopefully this article has helped to better define the appropriate path.
Michael D. Barrett has been practicing liability insurance defense since 1987. His areas of experience include workers' compensation subrogation, personal injury defense and coverage-related issues such as no-fault automobile insurance. Mike received his B.S., cum laude, from the University of Minnesota, where he was a member of the Gamma Sigma Delta Honor Society. He attained his J.D., cum laude, from William Mitchell College of Law. He was admitted to the Minnesota bar and the U.S. District Court for the District of Minnesota in 1987. Mike has served as a speaker at many client seminars. He is a qualified mediator and is listed on the Alternative Dispute Resolution Rule 14 Neutral Roster. He is a member of the Hennepin County Bar Association, the Minnesota State Bar Association and the Minnesota Defense Lawyers Association.
Mike has been married since 1982 and lives in Orono with his wife Dana and their children, Lauren and Matthew. Mike is active in a number of civic organizations such as the Casco Point Association, in which he previously served as its president. In the past he has served as special deputy of the Hennepin County Sheriff's Water Patrol. In his spare time, Mike enjoys woodworking.
direct dial number: (612)525-6920
e-mail: mdb@cousineaulaw.com